Interim Report 2024

CORPORATE INFORMATION

INFORMATION FOR INVESTORS

KEY FINANCIAL HIGHLIGHTS

FINANCIAL AND OPERATING SUMMARY

• Calculated based on the average value between the beginning of the period and the end of the period.

MANAGEMENT DISCUSSION AND ANALYSIS

MARKET REVIEW

During the six months ended 30 June 2024 (the "Period"), in facing the new challenges brought by the complicated and acute external environment and the continuous deepening of domestic structural adjustments, the People's Republic of China (the "PRC" or "China") pushed forward steadily the supply-side structural reform, proactively expanded domestic demand and facilitated consumer spending upgrade to drive the national economy to continue regaining its sound situation, new momentum accelerating its growth and high-quality development making new progress, demonstrating strong resilience and vitality.

According to the data from the National Bureau of Statistics of China, China's gross domestic product (GDP) increased by 5.0% year-on-year in the first half of 2024, remaining an important driver of global economic growth. The contribution rate of consumption expenditure to economic growth in the first half year reached 60.5%, driving GDP growth by 3.0 percentage points, making it an indispensable pillar of China's economic growth. In the long run, the implementation of promoting- consumption policies and the innovation and expansion of consumer scenarios will lay a solid foundation for the sustained growth of demand in China's collagen sausage casings market.

BUSINESS REVIEW

In 2024, Shenguan Holdings (Group) Limited (the "Company") and its subsidiaries (collectively the "Group") welcomes its 45th anniversary of corporate development and its 15th anniversary of listing in Hong Kong. From producing the first collagen sausage casings in China to possessing three world-first core technologies, the Group has become a world-class enterprise in collagen sausage casings. The Group is accelerating the development of the grand health industry under the "Three Developments and One Core" strategy. Relying on the collagen core technology with a complete triple helix, the Group has successfully launched six series of new products of collagen sausage casings to further consolidate its leading position in the collagen sausage casings market. At the same time, the Group intensifies its expansion in three major industries, namely collagen food products, collagen skincare products and collagen medical biomaterials.

Collagen Sausage Casings

During the Period, the Group successfully developed and launched six new products of the collagen sausage casings series, namely "fried", "crispy", "fresh", "tender", "bright" and "colorful", and held new product promotional seminars and global investment promotion seminars to initiate industry exchanges. The new products earned unanimous customer praise, laying a solid foundation for promoting the comprehensive upgrade of collagen sausage casings products and covering market needs. To cope with the launch of new products, the Group also constantly strengthens and improves its production capacity. The plan of production capacity expansion formulated by the Group has basically been achieved, with the production capacity of collagen sausage casings reaching 7 billion metres. Meanwhile, the Group has also upgraded and renovated its facilities related to raw material warehousing, storage, pre-processing, collagen extraction, sausage casings production and environmental protection.

Other Products

With the deepened implementation of the "Healthy China 2030" Planning Outline, as a sunrise industry, the grand health industry enjoys enormous development potential. It is a national emerging strategic industry with the engagement of various "new power and new energy". By focusing on the grand health industry, it will bring a strong driving force to the development of China's health industry. During the Period, the sales revenue of collagen food products, skincare products and medical biomaterials increased by approximately 327.0% as compared with the same period last year (the "Prior Period").

For collagen food products, the Group is committed to promoting the innovative application of collagen in the food industry and has developed a series of bovine collagen food products represented by ready-to-eat "beef tendon" with collagen as the main raw material, as well as health food products such as collagen oat drinks and brown sugar ginger tea, etc. Several collagen food products were comprehensively upgraded during the Period from packaging to texture to better in line with consumer needs nowadays. The overall sales of collagen food products also increased as compared to the same period last year.

MANAGEMENT DISCUSSION AND ANALYSIS

For collagen skincare products, the Group's highly active and easy-to-absorb collagen technology has enabled the creation of a wide range of products such as collagen essence, collagen facial mask, collagen hand cream, collagen lotion, collagen cream and collagen gel, etc., which provide consumers with safe and mild high-quality skincare products with better effects.

During the Period, the Group performed particularly well in the collagen medical biomaterials segment, with the endotoxin content of the Group's medical collagen raw materials extracted through its proprietary technology being only 0.01EU/ml, which is better than the FDA's standard of 0.5EU/ml in the USA. The prospects of selling medical collagen raw materials were promising, representing an increase of 648.7% as compared with the Prior Period. The clinical report of "collagen bone filling biomaterials (artificial bone) (膠原蛋白骨填充材料(人工骨))" has been completed, and the application for the next stage of Class III medical device products license is being prepared. The "oral post-operative medical collagen sponge (口腔術後醫用膠原蛋白海綿)" has passed the ethical stage, and will enter the clinical trial stage in the second half of this year. The "medical collagen dressing (醫用膠原蛋白敷料)" and "small beauty needle (小美容 針)" are now entering the stage of physical and chemical index testing and animal trial.

Honours of the Group

During the Period, the Group's trademark of "Shenguan" was enlisted on the China's First Batch of Key Trademark Protection Lists for Light Industry (中國第一批輕工業重 點商標保護名錄) at the "2024 China Light Industry Intellectual Property Conference (2024年中國輕工業知識產權大會)" organized by China Light Industry Enterprise Management Association (中國輕工業企業管理協會). In addition, the Group's halal collagen sausage casings have also successfully obtained the "Halal Certificate (清真證 書)" issued by the Halal Foundation Center.

Patents

As of 30 June 2024, the Group had the following patents:

Quality Control

The Group strictly controls every production link to ensure its products are of the highest quality and comply with all applicable food safety requirements. The Group's production and manufacture of collagen sausage casings has passed the certification of ISO9001 Quality Management System, ISO22000 Food Safety Management System, ISO10012 Measurement Management System and ISO14000 Environmental Management System, and has obtained the Food Production Licence and the Filing of Export Food Manufacturers (出口食品生產企業備案證). The Group has also registered with the Food and Drug Administration in the United States for exporting of sausage casing products to Southeast Asia, Europe and the United States. In addition, the production of all the Group's sausage casing products has strictly complied with the national standards (GB14967-2015) and sausage casing manufacturing industry standards (SB/T10373-2012) of the PRC. All these certifications are the recognition of the Group as a trustworthy product supplier to its customers.

MANAGEMENT DISCUSSION AND ANALYSIS

Guangxi Wuzhou Zhongguan Testing Technology Services Co., Ltd. ("Wuzhou Zhongguan"), a subsidiary of the Group, is able to examine over 800 indicators, including physicochemical indicators such as heavy metals and microelements, pesticide residues, microorganisms and proteins, and continues to independently undertake third-party inspection assignments, provide various food and relevant product testing services and issue officially recognised testing reports, contribute external sales revenue. Such qualifications recognition is going to lay a solid foundation for the Group to develop into a high-end collagen raw materials base, thereby facilitating the healthy development of the Group's collagen food products, collagen skincare products and collagen medical biomaterials in the grand health industry.

Customer Relationship

The Group is committed to developing long-term cooperation relationships based on mutual trust with its business partners and has built a stable customer base. The Group has established its closely-knit yet extensive network of leading meat products processing and sausage manufacturers, not only for cooperation with enterprises in the PRC, but also with those in various overseas markets, such as Southeast Asia, South America and the United States. During the Period, the Group continued to supply high-quality sausage casing products to a number of renowned food suppliers in the PRC. On the basis of stabilising existing customers, the Group continued to solicit new customers and achieved favourable outcome.

Supply of Raw Materials

Cattle inner skin is a major raw material for collagen sausage casing production. The supply of cattle inner skin remained stable over the past few years. However, due to factors such as the economic downturn, the supply of cattle inner skin was slightly tightening in both 2022 and 2023, which was alleviated during the Period with a decrease in price compared to the Prior Period.

Guangxi Zhiguan Industrial Development Co., Limited ("Guangxi Zhiguan"), one of the Group's major cattle inner skin providers, applied for the Food Production Licence under "the Measures for the Administration of Food Production Licensing" of the PRC and "Food Safety Law" of the PRC on a voluntary basis. The licence has been granted by Wuzhou Bureau for Administrative Examination and Approval with a valid period until October 2027.

FINANCIAL ANALYSIS

Revenue

Revenue decreased by approximately 11.2% to approximately RMB452.4 million for the Period from approximately RMB509.3 million for the Prior Period. During the Period, the operation of some lower-end products was unsatisfactory, and the Group also carried out product upgrading by launching six new product series. The focus of promotion was slowly shifted from the old products to the six new products, which required maintaining communication with customers and optimizing the products according to customers' needs at the initial stage of launching of the new products. During the period of product transition and coordination with customers, sales was inevitably affected to a certain extent.

Cost of sales

Cost of sales decreased by approximately 19.5% to approximately RMB373.3 million for the Period from approximately RMB463.5 million for the Prior Period, including the write-off and provision of inventory of approximately RMB5.6 million, as compared to approximately RMB6.1 million for the Prior Period. The costs of raw materials for the Period decreased by approximately 24.1% to approximately RMB164.8 million as compared with that of the Prior Period. In addition, the charges for energy decreased by approximately 17.1% to approximately RMB76.4 million. The direct labor costs decreased by approximately 11.6% to approximately RMB75.5 million.